ECN 203 Lecture Notes - Lecture 9: French Wine, Deadweight Loss, Import Quota
Document Summary
A country has a comparative advantage in a good if it produces the good at a lower opportunity cost than other countries. Countries can gain from trade if each exports the goods in which it has a comparative advantage. Pw = the world price of a good, the price that prevails in world markets. Compares if something is sold in us or international. Country has comparative advantage in the good. Under free trade, country exports the good. Under free trade, country imports the good. Area above equilibrium price, under demand curve and above supply curve. Total surplus = a + b + c. Before was a + b - now just a. Ps = b + c + d. Cs = a + b + d. Total surplus = a + b + c + d. May achieve lower costs by producing on a larger scale. Competition from abroad may reduce market power of domestic firms.